Topic: On the Source and Instability of Probability Weighting

Speaker: Cary Frydman, Associate Professor, USC Marshall School of Business

Time: 10:00am-11:30am, Wednesday, September 17

Location: 4-101

Abstract:

We propose and experimentally test a new theory of probability distortions in risky choice. The theory is based on a core principle from neuroscience called efficient coding, which states that information is encoded more accurately for those stimuli that the agent expects to encounter more frequently. As the agent’s prior beliefs vary, the model predicts that probability distortions change systematically. We provide novel experimental evidence consistent with this prediction by manipulating and measuring a subject’s prior beliefs. The data reveal that lottery valuations are more sensitive to probabilities that occur more frequently under the subject’s reported prior beliefs.

Speaker Biography:

Cary Frydman is an economist who specializes in behavioral finance and experimental economics. His research is interdisciplinary, drawing on principles from psychology and neuroscience to answer questions in finance and economics. He is the recipient of an NSF CAREER award and currently serves as an Associate Editor for the Review of Financial Studies, Journal of Financial Economics, and Review of Finance. His work has been published in the leading finance and economics journals and he has won awards for both his research and teaching in the core curriculum at Marshall.